Chief financial officers-once considered morally neutral figures in the corporate world--are now often cast as villains.
Enron Corp.'s Andrew Fastow and WorldCom's Scott Sullivan might immediately come to mind as high-profile names of CFOs who recently have fallen from grace, with both facing charges of massive fraud linked to spectacular corporate collapses. But healthcare is seeing its share of tainted CFOs, as well.
Consider the five HealthSouth Corp. CFOs who have been charged with fixing company books. Two of those, Weston Smith and William Owens, were the first to be charged with falsely certifying the accuracy of company accounts with the Securities and Exchange Commission, one of the provisions of the Sarbanes-Oxley corporate accountability law enacted last year.
In another highly publicized case, Tenet Healthcare Corp. CFO David Dennis, along with Chief Operating Officer Thomas Mackey, retired last fall amid government scrutiny of the company's bloated Medicare outlier reimbursements.
And earlier this year, Universal Health Services dismissed its financial chief Kirk Gorman after Gorman expressed "philosophical differences" with the company's audit firm.
CFO downfalls haven't been limited to the earnings-obsessed investor-owned companies, either. Financial officers of some not-for-profit organizations have left under a cloud of suspicion, too, usually resigning after their organizations suffer a financial setback (See chart). Those departures have been linked to a wide variety of factors ranging from simple mismanagement to self-dealing and even criminal theft charges.
While many say malfeasance by CFOs probably hasn't increased, the past 18 months have put the actions of CFOs under a powerful microscope, by regulators and corporate boards. In some cases, those actions aren't standing up to scrutiny.
In addition, increasing financial pressure in some parts of the industry has contributed to CFO turnover.
"The bull's-eye is on their forehead," says Joseph Carcello, an accounting professor at the University of Tennessee and president of the auditing section of the American Accounting Association. "The regulatory community--the (SEC) and the Justice Department and, in healthcare, the overseers of Medicaid and Medicare--believe probably with some validity that there have been a lot of abuses in financial reporting during the last three to five years. So they have ramped up enforcement significantly."
While a chief executive officer can deny knowledge of accounting tomfoolery, "that's virtually impossible for the CFO," Carcello says.
William Smith, a healthcare bankruptcy lawyer with McDermott, Will & Emery in Chicago, says that when there's wrongdoing, "inevitably (the CFO) has to go along. If the person is competent at all, he or she is going to have to understand that the books are not properly prepared. He or she is going to be at least a passive participant if there is fraud."
Guilt by association
In some cases, CFOs take the heat even though they may not have been the only instigator, or even the prime transgressor. Such is alleged to be the case at HealthSouth Corp., where President and CEO Richard Scrushy is accused in court papers of masterminding fraud against investors. Allegations of accounting irregularities include overstatement of earnings of at least $2.5 billion since the company was founded. Although all of the CFOs since HealthSouth's inception have been charged, Scrushy has yet to face charges.
In 1995, former Cape Coral (Fla.) Hospital CFO Jay Murphy pleaded guilty to stealing more than $290,000 from the not-for-profit hospital and was sentenced to 18 months in prison. David McConnell, a former CFO with not-for-profit Allegheny Health, Education and Research Foundation, Pittsburgh, settled a criminal charge that he misused the system's funds. He agreed to enter a first-time offender program but admitted no guilt (Sept. 17, 2001, p. 28). In both cases, other company executives, including the CEOs, were charged.
Regardless of the level of culpability, observers say the bottom line for CFOs is that they are expected to adhere to the highest standards when it comes to protecting an organization's finances.
Richard Clarke, president and CEO of the Healthcare Financial Management Association, says even if there's pressure from the chief executive to lie, "That does not at all excuse the CFO. The CFO is supposed to uphold (proper) reporting and be of the highest ethical fiber."
Sarbanes-Oxley requires CEOs and CFOs to attest to the accuracy of financial results to investors, but Clarke says there's nothing new about the concept that it's the executives' responsibility to assure investors that the numbers are correct to the best of management's knowledge. He attributes "extraordinary pressure from Wall Street to meet projections" for what he calls the "mind-boggling scale" of recent scandals in public companies.
Still, Clarke does not believe there has been an increase in errant CFOs, only in scrutiny of them. And Clarke says the number of disgraced CFOs is "a relatively small list in proportion to the number of organizations that are out there."
William Cleverley, president of Cleverley and Associates, Columbus, Ohio, a healthcare financial data company, agrees that wrongdoing by CFOs is probably no greater than in the past, although such cases are drawing more attention by investors, regulators, boards and the media.
Cleverley says there's no mystery why CFOs have been under fire. "I think there is a five-letter word that accounts for most of it, and that's greed," Cleverley says, especially at public companies where a CFO's personal income can be tied to a company's financial ratios. "That's not to say some incentives (to lie) don't exist in the not-for-profit sector, but they are nowhere near as strong," Cleverley says. At some not-for-profits, bonuses are tied to a facility's financial performance, but the dollar amounts are much smaller, he says.
Not-for-profits also present opportunities for theft, particularly if financial controls are inadequate. For example, the FBI has been investigating Patricia Mahaney, former CFO of North Broward Hospital District in Fort Lauderdale, Fla., for potential possible conflicts of interest since last fall. Earlier this month she was charged with two counts of theft dating back to checks she allegedly deposited into her personal account in 1998 (June 9, p. 4).
The hospital district told Modern Healthcare that "administrative irregularities" were identified during a "standard review of business operations," but the improper checks actually were discovered by law enforcement. District officials say new accounting procedures have been added in recent months to strengthen the district's financial oversight.
Taking the heat
It's always been common for CFO departures to coincide with a company's financial downturn. For example, red ink saturated the managed-care industry when CFOs of at least five health plans resigned in a five-month span five years ago (March 16, 1998, p. 76). Meanwhile, Deaconess Health Care in Oklahoma City and New England Baptist Hospital in Boston both replaced their CFOs in the past year amid unexpected financial losses.
"CFOs have historically been hit if earnings aren't good. They've been the lightning rod," Cleverley says.
In some cases, a departing CFO has been explicitly faulted for mismanagement. At Central Kansas Medical Center, Great Bend, a part of Denver-based Catholic Health Initiatives, hospital officials were quoted in local media saying that proper accounting procedures were not being followed. Likewise, the CFO of Glenwood Regional Medical Center in Louisiana resigned last year amid what hospital officials described as "chronic problems" in the billing department.
Nyack (N.Y.) Hospital blamed its former CFO, who resigned in September 2000, when it restated two years' of financial results in 2002. Eric Broder left after a costly nursing strike, after which the hospital alleged that a temporary nurse-staffing firm overcharged the hospital by millions of dollars and that Broder hid those extraordinary costs from the board. Broder eventually quit to work for the firm. The hospital says it settled its litigation with Broder last fall with no money changing hands, but it agreed to pay a settlement of $620,000 to bondholders this spring. The hospital's lawsuit against its accountant, KPMG, is pending.
One fallen CFO who hasn't been connected to malfeasance is Larry Stephens, who served at Deaconess in Oklahoma City for three years before resigning effective this month. Stephens says taking responsibility for financial failure is part of the CFO's role.
Stephens says he approached the hospital's CEO Paul Dougherty last year, pledging to leave if losses at the hospital did not improve. "The discussion I had with my boss was if I can't get it done for whatever reason, it's probably time for him to find someone else who can," Stephens says. Although he says he's not totally responsible for the organization's problems, Stephens, 50, says, "When there's bad performance, (CFOs) have to take the hit."
Deaconess' losses increased in the first six months of its current fiscal year. Adding to the pressure to resign, Stephens says he was discouraged by "ongoing cost pressures" in the industry, as well as the degree of communication that was required to influence clinical decisionmakers. "Finance spends a lot of time going over what we do, and we're so intimately involved with the product. We are sometimes challenged when people want to spend a whole lot of time going over it again," Stephens says.
Hazardous turns ahead
Aside from a turbulent economic environment, new certification and internal control requirements under Sarbanes-Oxley and other regulations present new career hazards for CFOs. Many of these requirements are being adopted voluntarily by not-for-profits and private companies.
At the behest of boards, auditors are doing more digging into accounting practices, Clarke says, and there is "much more focus on management's estimates and the process management uses to keep track of things." Gone are the often cozy relationships that used to exist between CFOs and audit firms, and between CFOs and their governing boards.
A prime example is UHS' Gorman, who apparently shook the confidence of the hospital chain's board after he sent candid letters to the company's auditor, KPMG, saying he was willing to sign a letter attesting that the company's financial statements were accurate but would rely on the accounting firm to ensure that the accounting treatment complied with generally accepted accounting principles.
While Gorman's specific differences of opinion with KPMG were never made public, the company's board chose to side with its outside audit firm rather than its in-house finance chief. "Where there's a dispute between the CFO and the auditor, the capital markets will often interpret that as indicating a situation where the CFO wanted a particular kind of accounting that was too aggressive," Carcello says. "That puts the audit committee (of the board) in a touchy position."
Heightened scrutiny of management by boards--including closer relationships between boards and audit firms--has been widely encouraged both by corporate reform advocates and healthcare professional organizations. Many would argue that heightened vigilance is a good thing.
In a recent report, Cleverley compared Enron and Nyack Hospital, both of which restated earnings and have been sued by investors for providing inaccurate reports. In both cases, Cleverley says, the restatements did not make a significant difference in the organizations' financial health, and "an attentive board could have and probably should have figured out there was a big problem well in advance" of the failure, he says.
Cleverley says a variety of reasons might account for why boards of not-for-profit hospitals do not heed warning signs, including a lack of previous close calls at the institution, lack of financial expertise, over-reliance on management for oversight of operations, overwhelming amounts of data, as well as industry complexity. He suggests that public accounting firms take a larger role by expressing an opinion on the financial health of the hospital or system as well as certifying numbers, and that board members become better educated.
Pay for performance
If there is any consolation for CFOs, some experts predict they will command even higher salaries to compensate for their greater responsibilities. CFO salaries, like those of other senior executives, have been increasing at greater rates than overall wages. Last year, healthcare system CFOs commanded a median of $265,200, up 9% from 2001, while CFOs of independent hospitals earned a median of $190,700, up 14%, according to compensation firm Clark Consulting, Barrington, Ill.
But despite their growing compensation, not all CFOs welcome the increasing scrutiny.
Kevin Brennan of Geisinger Health System in Danville, Pa., says that although relations between board members and management are good, tensions have increased for both sides. Last year, Brennan gave his board's finance and audit committee members a detailed presentation of discretionary items on the system's balance sheet, only to have the board turn around and ask the system's audit firm to review his work in a closed session without Brennan present. Brennan says he felt as if he was being second-guessed.
"Quite frankly, as educated and involved as governance is, they are not full-time financial managers, and even the auditors sometimes may not know a particular issue. I personally have a degree of nervousness when those sessions (without management) occur," Brennan says.
There's also concern that CFOs have become "overly conservative" in making estimates for items such as allowances for adjustments in managed-care contracts in order to avoid negative surprises, Cleverley says.
Some believe that the current trend may have swung too far, into what Carcello calls "hyper-vigilant oversight." Among the unintended consequences of heightened regulation are higher accounting and auditing fees, directors and officers' insurance premiums, and legal fees stemming from the new regulations. He says those cost burdens could force small companies out of the public markets, restricting economic growth.
Carcello also cites jail time of as long as 25 years for securities fraud under Sarbanes-Oxley.
"I am a strong believer that there need to be serious sanctions for securities fraud, but when you can go to jail longer for misstating financial results than for manslaughter or rape, I think there's something out of whack," Carcello says.
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